Are Builders Getting Bang for the Buck?

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Reprinted from Tax Credit Advisor 
Issue: May 2021

by Scott Beyer

A Balancing Act Around Energy Efficient Construction

Energy efficient construction (EEC) is a focus area for cities and states as they move to reduce carbon emissions – after all, current buildings account for nearly 40 percent of such pollution. In many jurisdictions, developers—and consumers, to whom costs are passed down—must contend with building code changes that call for more EEC. But these areas also have introduced tax incentives to aid the process. It all speaks to a balancing act that cities must have between encouraging the energy efficiency and affordability of a building.

Broadly speaking, energy efficiency is realized in the following three areas: reducing the power needed for temperature control; making home devices themselves more efficient, such as by programming them to respond directly to immediate needs; and targeting reductions in energy use, for example through solar panels and other green equipment that gets buildings to net zero.

Accomplishing this for retrofits is typically very expensive: an upstate New York single-family home retrofit project cost $100,000. Installation of a geothermal HVAC system, according to The Environmental Magazine, costs between $11,000 and $25,000.

But looking at such costs in isolation is misleading, says Ravi Malhotra, with the International Center for Appropriate and Sustainable Technology (ICAST), a Colorado-based nonprofit that works with developers, property owners and municipalities. The idea that EEC is more expensive is “just a myth, it ain’t true,” he says. For one, since labor is the majority of a project’s cost, the materials only impact capital expenses so much. For another, the cost premium of some materials, such as lightbulbs, is negligible, and efficiency savings are significant. Similarly, a study of energy efficient multifamily projects in New York City identified 28 to 68 percent cost reductions.

Energy efficiency is often measured through certification programs. An increasingly common designation is called “passive house,” which requires buildings to cut energy required for heating and cooling by 90 percent and general energy use by two-thirds. This works by “optimizing the building envelope,” according to Edward Connelly of New Ecology, a Boston- based energy efficiency consulting and construction nonprofit. Passive design tactics include using solar thermal generation for water heating, and designing decks to optimize a balance between sun in the winter and cooling in the summer.

Passive house is commonly associated with single-family homes, but the techniques are being adopted by multifamily projects. A Boston public housing complex is building 55 units on-site with passive measures. Nate Thomas, overseeing the project, told New England Real Estate Journal that an additional benefit will be better comfort during power failures, because passive construction optimizes climate control without power use.

Several states are attempting to actively shape policy to require EEC. Connelly cites New York, Maryland and Massachusetts as states that have been aggressively strengthening their building codes with respect to efficiency requirements. He says that Massachusetts and Minnesota have introduced energy efficiency as a favorable criterion in its qualified allocation plan for tax credits.

A plethora of incentives have been rolled out at several levels of government. In the late 2010s, the IRS introduced credits for installing alternative energy equipment, up to 30 percent for installations from 2016 to 2020. Los Angeles is spending $100 million to support multifamily affordable retrofits. In addition to Minnesota’s QAP approach, the city of Minneapolis makes a $100,000 credit available for market-rate projects that include at least 20 percent affordable units. These subsidies reduce the upfront costs drastically, according to Malhotra; for instance, the green loan program from the Federal Housing Authority decreases a project’s mortgage insurance premium, potentially saving thousands annually.

Still, the construction industry remains reticent to locking in EEC as a norm. In March, the International Code Council, which sets industry standards for building code structures, voted to cut government representatives out of the process of setting standards. Popular Science reports that this could stymie the input of cities who have been aggressively promoting efficient codes. The National Association of Home Builders and the Leading Builders of America also objected to sweeping proposed recommendations, such as guaranteed space for electric vehicle charging and electric stoves.

Writing for the Daily Signal, Arthur Corbin, president of Georgia’s Municipal Gas Authority, blasted energy efficiency requirements. He claims that tax benefits only minimally increased the purchase of high-efficiency furnaces, and that proposed regulations would be burdensome for low earners.

“Technological advances are making natural gas residential furnaces more efficient, and the public is snapping them up when they save money,” wrote Corbin. “This is proof that the market is working.”

But advocates believe that once policies change, EEC will become common. In Massachusetts, Connelly says, “We’ve gone from a couple years ago not having any active projects…to having 30.”

New Ecology and ICAST work with developers to make buildings as efficient as possible. This doesn’t necessarily mean meeting certifications like passive house, says Malhotra.

“Our value proposition means you’ve got a budget, right, allow us to build a more efficient building” through utilization of incentives or installing more efficient equipment. “We can’t always get to that proposition” when the cost for projects is too high.

Malhotra believes that restrictions on subsidized affordable projects add additional complications, and that certifications can be counterproductive, because they incentivize installations like bike storage and community gardens that go unused. Because public housing authorities are not authorized to use debt financing, and they do not benefit from tax credits, their capacity to receive subsidies is constrained. Weatherization funding for multifamily properties is only available in six states for apartments – which Malhotra points to as a barrier for bringing EEC to affordable housing.

As with net-zero housing, advocates of EEC argue that the capital costs of their preferred method are offset by long-term savings. The industry may be skeptical, but increasingly, it is faced with cities insisting on this form of construction. At the same time, many such jurisdictions have increased subsidies to support EEC. This provides developers with financing support to bridge the gap between EEC risk and reward.

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